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Introductory Topics

Selected Topics from

Chapters 1, 2 & 3
 Learning Objectives
1. Understand the basic difference between Microeconomics
and Macroeconomics
2. Understand the Scarcity Principle, Cost-Benefit Principle,
and Opportunity Cost
3. Understand Production Possibilities Frontier.
4. Understand the basics of Demand and Supply

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 Learning Objective: 1

Understand basic differences between

Microeconomics and Macroeconomics

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 Microeconomics and
Macroeconomics
- Microeconomics studies the behavior of individual economic units, such
as households, firms, and markets. Analyzes how individuals make
choices and its implications for price and quantity in individual markets.
- Microeconomics considers topics such as
 Costs of production.
 Demand and supply for a product.

- Macroeconomics studies the performance and behavior of an entire

economy. It focuses on aggregate variables such as inflation,
unemployment, and economic growth.
-Macroeconomics considers topics such as:
• Monetary policy.
– Government Budget Deficits.

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 Learning Objective: 2

Understand the concepts of Scarcity, Cost-Benefit,

and Opportunity Cost

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 The Scarcity Principle

- The Scarcity Principle:

We have boundless wants, but resources are limited. Having more
of one good thing usually means having less of another.
- We have to make choices or trade-offs.

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 The Cost-Benefit Principle
• According to the Cost-Benefit principle, we should take action
if and only if the extra (marginal) benefits are at least as great
as the extra (marginal) costs.

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 Economic Surplus

• Rational individuals should make decisions based on the

Cost-Benefit Principle, which means taking those actions that
yield the largest possible economic surplus.
• The economic surplus of an action is equal to its benefit
minus its costs.
• Economic surplus = Total Benefits − Total Costs.
• If we get $10 of savings from walking to town, and our costs
of walking to town are $4, then the economic surplus from
walking to town is $10 − $4 = $6.

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 Opportunity Cost

- Opportunity cost is the value of what must be foregone in order to

undertake an activity.
- Your opportunity cost of engaging in an activity is the value of
everything you must sacrifice to engage in it.
- Examples:
• Give up an hour of dog walking job to go to the movies. To see
the movie, the ticket cost is $10, and the sacrifice of $20 from
dog walking, then the opportunity cost of seeing the film is $30.
- Consider both explicit (actual monetary costs) and implicit costs
(costs associated with the best alternative forgone; hard to attach a
monetary value) to estimate the opportunity cost.
-Some economists may use only the implicit cost to refer to the
opportunity cost.
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 Production Possibilities for an
Economy

• It is a graphical representation that shows the maximum

potential output combinations of two goods or services that an
economy can produce, given its current level of technology
and inputs, assuming full utilization of resources.

• Key points about the Production Possibility Frontier (PPF):

Scarcity,
Opportunity Cost,
Efficiency, and
Underutilization and Unattainability

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 The Principle of Increasing
Opportunity Cost 1
Maximum coffee: 100,000 lb/day
• Give up 5,000 pounds coffee, get 20,000 pounds of nuts.
• Give up another 5,000 pounds of coffee, get 10,000 additional
pounds of nuts.

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 The Dynamic Economy

 A PPF represents current choices. Any points on PPF are

efficient and attainable using the current resources available.
 Changes in choices occur over time due to:
- More resources:
• Investment in capital.
• Population growth.
- Improvements in technology.
- Increases in knowledge.

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 Shifts in PPC

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 Learning Objective: 4

Understand the basics of Demand and Supply

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 Demand Curve

• A demand curve illustrates the quantity buyers would purchase at each

possible price. The demand curve has a negative slope, i.e., consumers
buy less at higher prices and more at lower prices.

• Horizontal interpretation of demand curve:

- Given the price, how much will buyers buy?
At a price of $4, the quantity demanded is
8,000 slices/day.
• Vertical interpretation of demand curve:
- Given the quantity to be sold, what price is
the marginal consumer willing to pay?
The marginal consumer is willing to pay $4
per slice for the 8,000th slice sold in the
market.
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 Income and Substitution Effects
- Buyers buy more at lower prices and buy less at higher
prices.
What happens when the price goes up?
• The substitution effect: Buyers switch to substitutes when
the price goes up.
• The income effect: Buyers' overall purchasing power goes
down.

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 The Supply Curve
• The supply curve illustrates the quantity of a good that sellers are willing
to offer at each price. The supply curve is typically upward-sloping,
indicating a positive relationship between price and quantity supplied.

• Vertical interpretation of supply:

Given the quantity to be sold, what is the
opportunity cost of the marginal seller?
The marginal cost of producing the 8,000 th
slice is $2.
• Horizontal interpretation of supply:
Given the price, how much will suppliers
offer?
At a price of $2, suppliers are willing to sell
8,000 slices/day.
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 Market Equilibrium 2

The market equilibrium occurs when all buyers and sellers are satisfied
with their respective quantities at the market price.

• At the equilibrium price, quantity supplied

equals quantity demanded.
• No tendency to change P or Q. Buyers are
on their demand curve, and the sellers are
on their supply curve.

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 Excess Supply and Excess Demand
Excess Supply Excess Demand
• At $4, 16,000 slices were supplied, • At $2, 8,000 slices were supplied,
and 8,000 slices were demanded. and 16,000 slices were demanded.

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 Movement along the Demand Curve- i.e.
Change in Quantity Demanded
• When the price goes up, the quantity
demanded goes down.
• When the price goes down, buyers
move to a new, higher quantity
demanded.
• A change in quantity demanded
results from a change in the price of a
good, while other factors that can
affect demand remain constant.

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 Shift in Demand- i.e. Change in
Demand
• A shift in demand refers to a change in the
entire demand curve for a good or service
caused by factors other than a change in price.
When demand shifts, consumers are willing
to buy different quantities at the same price
level.
• If buyers are willing to buy more at each
price, then demand has increased.
- Move the entire demand curve to the right,
i.e., Change in demand.
• If buyers are willing to buy less at each price,
then demand has decreased.

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 Causes of Shifts in Demand
• Changes in the price of related goods:
– Complimentary goods: for example, printers and printer ink cartridges.
– substitute goods: for example, tea and coffee.
• Changes in income: When consumers experience changes in their income
levels, it can influence their purchasing power. An increase in income may
lead to an increase in demand for normal goods and a decrease in demand
for inferior goods.
• Change in consumer preferences: for example, Marvel action figures after
the release of Marvel Studio film.
• Changes in population: for example, a growing population generally leads
to an increase in demand for goods and services.
• Expectations about future economic conditions, prices, or product
availability.
Price changes never cause a shift in demand
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 Movement Along the Supply Curve- i.e.
Change in Quantity Supplied
• A change in quantity supplied results from a change in the price
of a good.
• When the price goes up, the quantity supplied goes up.
• When the price goes up, sellers move to a new, higher quantity
supplied.

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 Shift in Supply- i.e., Change in Supply
Supply increases when sellers Supply decreases when sellers
are willing to offer more for sale are willing to offer less for sale at
at each possible price. each possible price.
Moves the entire supply curve Moves the entire supply curve
to the right. to the left.

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 Causes of Shifts in Supply
• A change in the price of an input, for example, raw materials, labor
wages, or energy price changes, can affect production cost and willingness
of producers to supply.
• A change in technology, for example, technological efficiency, leads to
lower costs and increased supply.
• Natural events: for example, weather conditions and natural disasters
might impact the supply of certain goods, like agricultural commodities
and outdoor entertainment.
• Number of sellers in the market.
• Expectation of future price changes.
• Government regulation, for example, changes in regulations, subsidies,
or taxes, can impact production costs. Say, government subsidy in a
particular industry increases might increase supply.
Price changes never cause a shift in supply
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 Supply and Demand Shifts: Four Rules1
Rule 1:
An increase in demand will lead to an increase in both
equilibrium price and quantity.

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 Supply and Demand Shifts: Four Rules2
Rule 2:
A decrease in demand will lead to a decrease in both
equilibrium price and quantity.

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 Supply and Demand Shifts: Four Rules3
Rule 3:
An increase in supply will lead to a decrease in the equilibrium
price and an increase in the equilibrium quantity.

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 Supply and Demand Shifts:
Four Rules 4

Rule 4:
A decrease in supply will lead to an increase in the equilibrium
price and a decrease in the equilibrium quantity.

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